1. Choosing a Form of Business Ownership
Chapter 5
Choosing a Form of Business Ownership

2. “…a business that is owned (and usually operated) by one person.”
Sole Proprietorships
“…a business that is owned (and usually operated) by one person.”

3. Forming a Sole Proprietorship
Simplest form of ownership
Easiest to start
Owner decides to start business and begins operations
Common in:
Retailing
Service
Agriculture
©2007 Microsoft PowerPoint

4. Figure 5.1: Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U.S.

5. Figure 5.2: Total Sales Receipts of American Businesses

6. Advantages of Sole Proprietorships
Ease of Start-up & Closure
Pride of Ownership
Retention of All Profits
Flexibility of Being Your Own Boss
No Special Taxes

7. Disadvantages of Sole Proprietorships
Unlimited Liability
Lack of Continuity
Lack of Money
Limited Management Skills
Difficulty in Hiring Employees

8. Partnerships
A voluntary association of 2 or more persons to act as co-owners of a business for profit
Much less common than sole proprietorship or corporation
No legal maximum on number of partners
© 2007 Digital Vision/Triangle Images

9. Types of Partners
General- person who assumes full or shared responsibility for operating a business
Active in day-to-day business operations
Each partner can enter into contracts on behalf of other partners
Assumes unlimited liability
Limited- person who contributes capital to a business but no management responsibility or losses beyond amount he/she invested

10. Articles of Partnership
“…an agreement listing and explaining the terms of the partnership.”

11. Advantages of Partnerships
Ease of Start-Up
Availability of Capital and Credit
Personal Interest
Combined Business Skills and Knowledge
Retention of Profits
No Special Taxes

12. Disadvantages of Partnerships
Unlimited Liability
Management Disagreements
Lack of Continuity
Frozen Investment
©Digital 2007 Vision/Triangle Images

13. Corporation
“…an artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts.”

14. Corporate Ownership Stock- shares of ownership of a corporation
Stockholder- person who owns a corporation’s stock
Closed corporation- a corporation whose stock is owned by relatively few people and is not sold to the general public
Open corporation- a corporation whose stock can be bought and sold by any individual

15. Forming A Corporation Consult a lawyer Where to incorporate
Cost of incorporating
Advantages/disadvantages of each state’s corporate laws & tax structure
Corporate Location
Domestic corporation- a corporation in state in which it is incorporated
Foreign corporation- a corporation in any state in which is does business except the one in which it is incorporated
Alien corporation- a corporation chartered by a foreign gov’t and conducting business in the U.S.
Organizational Meeting

16. Corporate Charter
“…a contract between a corporation and the state in which the state recognizes the formation of the artificial person that is the corporation.”

17. Stockholders’ Rights
Common Stock- owned by individuals who vote on corporate matters, whose claims on profit/assets are subordinate to others
Preferred Stock- owned by individuals/firms who do not have voting rights, whose claims on dividends paid before those of common-stock
Dividend- a distribution of earnings to stockholders
Proxy- legal form listing issues to be decided at stockholders’ meeting and enabling stockholders to transfer voting rights to other individual(s)

18. Corporate Structure
Board of Directors- top governing body of corporation, members are elected by stockholders
Corporate Officers- chairman of the board, president, executive vice presidents, corporate secretary, treasurer, and other top executive appointed by board of directors

19. Figure 5.4: Hierarchy of Corporate Structure

20. Charter and Article of Incorporation Include:
Firm’s name and address
Incorporators’ names and addresses
Purpose of corporation
Maximum amount of stock and types of stock to be issued
Rights and privileges of stockholders
Length of time corporation is to exist

21. Board FAQ’s The average size of boards is 16 Most boards pay members:
Stock options
Travel reimbursement
Cash stipends
Directors of top 250 companies average $238,000 - $261,000 (over $1,000 per hour) Source: Steven Hall & Associates 2008 study

22. FAQ’s
Most Boards organized into committees (i.e. compensation committee)
Many Boards have term limits and evaluations of performance
Boards generally meet every quarter

23. Boards Pepsi Cola Microsoft Family Boards
© 2009 South-Western, a division of Cengage Learning

24. Advantages of Corporation
Limited Liability
Ease of Raising Capital
Ease of Transfer of Ownership
Perpetual Life
Specialized Management
©2007 Digital Vision/Triangle Images

25. Disadvantages of Corporations
Difficulty and Expense of Formation
Government Regulation and Increased Paperwork
Conflict within Corporation
Double Taxation
Lack of Secrecy

26. Table 5.1: Largest U.S. Industrial Corporations
Source: Fortune 500. Copyright © 2006 Time, Inc., the Fortune website at accessed October 2, 2006.

27. Largest Private Corporations (2004)
e = Forbes estimate
Rank
Name
Industry
Rev($M) 1
Cargill
Crops
$62,900 2
Koch Industries
Oil & Gas
$50,000e 3
Mars
Food Processing
$18,000e 4
Publix Super Markets
Retail Grocery
$16,946 5
Bechtel
Const. Services
$16,337
“Largest Private Cos.”, Forbes.com,

28. Table 5.2: 10 Aspect of Business That May Require Legal Help

29. Table 5.3: Advantages/Disadvantages of Forms of Ownership

30. S-Corporations Corporation taxed as partnership Criteria:
No more than 100 stockholders
Stockholders must be individuals, estates or exempt organizations
Only 1 class of stock
Must be domestic corporation
No nonresident-alien stockholders
All stockholders must agree to S-corporation

31. Limited-Liability Companies (LLC)
Provides limited liability protection, taxed like a partnership
Advantages:
With 2 or more members = taxed as partnership avoiding double taxation,1 member = taxed as sole proprietorship
Extends protection of personal assets
More management flexibility when compared to corporations

32. Table 5.4: Advantages/Disadvantages of Corporations and LLCs

33. Not-for-Profit Corporations
“…a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit.”

34. Cooperatives, Joint Ventures, and Syndicates
Cooperative- association of individuals or firms, purpose is to perform some business function for members
Joint Venture- agreement between 2 or more groups to form business entity to achieve specific goal or operate for specific period
Syndicate- temporary association of individuals or firms organized to perform specific task requiring large amount of capital

35. Corporate Growth From Within
Expand present operations
Introduce/sell new related products
Sale of present products to new geographic markets/groups of consumers
Has relatively little adverse effect on firm
©2007 Digital Vision

36. Corporate Growth Through Mergers/Acquisitions
Merger- purchase of one corporation by another
Hostile takeover- situation in which management and board of directors of firm targeted for acquisition disapprove of merger
Corporate Raider
Tender Offer
Proxy Fight

37. The Acquisition of Jordan’s Furniture

38. Types of Mergers
Horizontal- between firms that make and sell similar products/services in similar markets
Vertical- between firms that operate at different levels in the production and marketing of a product
Conglomerate- between firms in completely different industries

39. Biggest Telecom Deals Each Year
Value ($B)
2006
$67.0
AT&T bids for BellSouth
2005
$31.5
Telefonica buys 02
2004
$41.0
Cingular buys AT&T Wireless
2003
-----
[no major deals]
2002
$29.2
Comcast buys AT&T Broadband
“AT&T + BellSouth by the Numbers”, TeleGeography, March 15,2006,

40. Figure 5.5: Three Types of Growth by Merger

41. Current Merger Trends Takeover Next Century
Pro- makes company more profitable
Con- does not enhance profitability, only ones who benefit are investment bankers, brokerage firms, takeover “artists”
Next Century
Cash-rich companies acquire businesses to enhance their position in the marketplace
More foreign companies/investors
Leveraged Buyout (LBO)- purchase arrangement allowing firm’s managers, employees, investors to purchase company, taking firm private